Listen to this article

Some big US companies have been able to slice hundreds of millions of dollars from their expenses by making subjective changes as to how they value employee stock options under new rules, accounting experts have warned.

Controversial new accounting rules that force US companies to deduct the cost of options from their profits have been undermined by methods that are unlikely to be challenged by their auditors as well as a lack of agreement on Wall Street about whether the costs matter, according to accounting experts.

The impact of the new accounting rules was felt broadly for the first time last week as many companies reported their first-quarterly earnings to include the costs. Imprecise valuation methods have left companies free to massage the figures as they see fit, accountants warned.

“It just gives [companies] the latitude to pick a number, any number,” said Lynn Turner, a former chief accountant at the Securities and Exchange Commission and now an analyst at Glass Lewis. “I just think this will be the latest version of the numbers game.”

Among the companies which have changed their options-valuation methods in ways that favoured their earnings, Intel was able to reduce its stock options costs last year by some $570m, while Cisco, one of the fiercest critics of the new regime, cut $640m from its expenses.

Both companies adopted the new rule before the bulk of US companies, but their experience is likely to be borne out when others reveal their own option-valuation methods, according to analysts. “Many of the inputs to the model are subject to some pretty wide discretion,” said Bob Willens, accounting analyst at Lehman Brothers.

In a note in its latest annual report, Intel said that it had cut the figure for share-price volatility that it uses to calculate the value of its employee options to 26 per cent, from 50 per cent the year before, a change that had the effect of reducing the value of the options.

“Management determined that implied volatility is more reflective of market conditions and a better indicator of expected volatility than historical volatility,” the chip company said.

The change helped to slash the value of each option Intel issued by 44 per cent compared with the previous year, the company revealed, greatly reducing the pressure on its profits.

Cisco, meanwhile, reassessed the expected life of its employee options, reducing this from 5.6 years to 3.3 years.